Estate planning for blended families

A blended family is a term used to describe a family unit where one or both partners have children from previous relationships. In an estate planning context, this can lead to important questions, such as how do I make sure my partner is looked after, but still preserve assets for my own children? Or how do we treat all the children fairly?

The current legislation doesn’t always cater for complex family circumstances. Without thoughtful estate planning, surviving partners can be left financially vulnerable, and children in a blended family may find themselves unintentionally missing out on an inheritance they reasonably expected to receive.

This article explores some of the estate planning issues faced by blended families and highlights steps that can be taken to protect family members and treat loved ones fairly.

Why are wills so important for blended families?

A well drafted will enables you to control the assets you hold in your sole name as well as your share of any assets owned jointly as ‘tenants in common’ (a legal form of co-ownership where people own separate and distinct shares of an asset).  

If you die without making a will, the law (not your personal wishes) will determine who inherits your estate under the intestacy rules in England and Wales set out in the Administration of Estates Act 1925.

The legislation doesn’t reflect the wide range of family structures that exist today and remains largely focused on more traditional family arrangements. It fails to consider:

• Unmarried couples
• Stepchildren
• Unrelated dependants
• More complex family dynamics

The intestacy rules also fail to offer protection for those who may not be in the best position to receive an inheritance; for example, if a person is unwell, vulnerable, lacks capacity, or where it wouldn’t be appropriate for them to receive an inheritance outright.

For blended families, in particular, the intestacy rules rarely provide results that a family would consider to be fair. The legislation doesn’t allow for:

• Ringfencing assets that one partner has brought into the relationship
• Reflecting each partner’s contributions to the relationship
• Addressing disparities in wealth between the partners
• Ensuring children and stepchildren are treated as intended

What one family considers “fair” will be personal to their circumstances. For blended families the intestacy rules are rarely able to provide a suitable outcome that reflects their wishes, often leaving family members upset and lacking the financial provision they feel they should receive.

By making a will you can decide how your estate is distributed and you have the opportunity to utilise helpful trust structures which will provide protection for your family, balancing their needs and achieving a fair outcome. 

Married couples: what type of will should we have?

In estate planning, married couples have an advantage when it comes to inheritance tax (IHT). This is because any assets passing between spouses on death aren’t subject to IHT – known as the spouse exemption. This allows for more sophisticated will planning. 

A popular planning structure for married couples is to include flexible (or overridable) life interest trusts in their wills. These trusts achieve the following outcomes:

1. The deceased’s assets are held in a trust for the primary benefit of the surviving spouse. This means the surviving spouse can continue to live in the family home rent free and their lifestyle is supported by the receipt of the income generated from the remaining assets held in the trust.
2. The deceased’s own assets and share of jointly owned assets held as tenants in common are protected within the trust for the eventual benefit of chosen beneficiaries. These beneficiaries can be children, stepchildren, wider family members, friends, or even charities.
3. The trust includes flexibility to allow capital to be passed to the surviving spouse, children, or other beneficiaries, if desired. 

Alongside the will, a letter of guidance, known as a letter of wishes, is prepared to explain to the trustees your ultimate goals, your priorities, and how you would like the trust to be administered.  

The benefits of this approach include:

• The needs of the surviving spouse, children, stepchildren and other beneficiaries are balanced which provides a fairer outcome for all.
• The ability to ringfence assets for particular beneficiaries.
• Flexibility in how a person’s wishes are carried out, considering any changing personal or financial circumstances.
• Deferral of IHT as any assets passing into the trust are initially covered by the spouse exemption from IHT. This means the payment of IHT is delayed until the surviving spouse dies. This offers IHT planning opportunities on first death.
• The Residence Nil Rate Band allowance (an additional IHT allowance currently available of up to £175,000 per person, subject to conditions and potential tapering) can still be claimed, provided a home is left into the life interest trust and direct descendants (which can include stepchildren) will inherit on the death of the spouse or partner.

For many blended families this is a great option which provides an effective and fair solution and reduces the risk of family conflict after death. 

Unmarried couples: what are the options? 

As unmarried partners cannot benefit from the spouse exemption for IHT, life interest trust will structures are often unsuitable. In these circumstances, discretionary trusts included within a will can offer a more practical alternative. 

A will containing a discretionary trust places the deceased’s solely owned assets and their share of any assets held jointly as tenants in common into a discretionary trust. The trustees hold the assets for the benefit of a defined class of beneficiaries, as chosen by the deceased. 

The trustees have discretion to:

• Allow the surviving spouse (or any other beneficiary) to continue to live in the family home rent free
• Pay capital or income to the listed beneficiaries, as appropriate
• Ringfence assets for particular beneficiaries
• Respond flexibly to changes in personal or financial circumstances

As with life interest trusts, a letter of wishes is prepared to guide the trustees in administering the trust and explain how the deceased would like their family to be provided for.

This will structure is often a great choice for unmarried couples in a blended family, allowing the surviving partner to be taken care of while protecting assets for children and stepchildren.

I’ve made my will – what else can I do?  

Assets falling outside of your estate

Your will governs the assets that form part of your estate. However, assets such as undrawn pensions, life insurance policies and death in service benefits often fall outside of a person’s estate and are paid at the discretion of the scheme trustees. 

It’s therefore important to keep beneficiary nominations up to date.

If you don’t want these assets to pass outright to a beneficiary, it’s often possible to ask that the trustees pay the benefits into a trust you have established during your lifetime. This allows the trustees of your choice to manage the funds for the benefit of your family, having regard to your wishes. 

Lifetime gifting

For some families, gifts can be made to children or other beneficiaries during your lifetime. If outright gifts aren’t suitable in a family’s circumstances, then gifts can be made to a discretionary trust to be used for the chosen beneficiaries until they are in a position to receive the assets or funds outright. 

Summary

Estate planning for blended families requires careful consideration and tailored advice. A well structured will, combined with appropriate trusts and lifetime planning, can help protect loved ones, reduce the risk of disputes, and ensure your estate is passed on in a way that reflects your wishes.

For advice tailored to your family circumstances, please contact our private client team who would be happy to review your will and discuss your wider estate plan.

Our content explained